Month: December 2015

If you’re buying a house soon, you may be mulling over the idea of getting an adjustable-rate mortgage. Or you were, until you heard about the Federal Reserve’s recent decision to raise interest rates a quarter point. That likely put a chill on many homeowners’ desires to have an adjustable-rate mortgage, also known as an ARM.

If you currently have an ARM, you might be in full-blown-panic mode, wondering if your interest rate is going to climb soon.

“My voicemail and email has been inundated by my clients, friends and partners all asking the same question, ‘What should I do about my ARM mortgage and when?'” says Drew Grandi, a loan originator with Wintrust Mortgage in Massachusetts.

What should you do? It really depends. An ARM can be a terrific strategy for paying a mortgage, or a terrible one. Before you get one, or get rid of one, you need to think about how you want to proceed.

What Is an ARM?

It’s a home loan with a fixed interest rate, usually for five years — but after that, it can adjust every year. (That’s why you’ll often hear ARMs referred to as a 5/1 ARM, although you could have a fixed interest rate for a different period, like a 7/1 ARM or 10/1 ARM.)

After those five or more years are up, the interest rate can go up or down for the duration of your mortgage.

Because the interest rate could go up, it can be risky to have an adjustable rate. Nobody wants an ARM to cost them an arm and a leg.

So why get an ARM if your monthly mortgage payment can turn on you like that? Because the fixed rate for those five years or so is lower than a traditional fixed mortgage rate. It hasn’t been all that much lower in recent years, of course, since all mortgage rates have been low. Still, even a percentage point can reduce a mortgage payment enough to save a homeowner thousands of dollars in the long run.

How High Can an ARM Go?

While your monthly mortgage payment can adjust every year to a higher and higher rate, there is a limit to how much financial pain you’ll endure.

“There are protective caps, so the loan cannot adjust higher than the designated annual cap or lifetime overall rate cap,” says Staci Titsworth, regional manager of PNC Mortgage in Pittsburgh. This is looked upon as insurance against risk.

“Most ARMs are capped so that your interest rate will not exceed more than 5 percent above your original rate,” Grandi says.

That doesn’t sound so bad, but it can add up. Grandi offers an example of the homeowner who has a 5/1 ARM at 3 percent on a $300,000 mortgage. That would mean you’re paying $1,264.81 a month for the first five years, he says. If interest rates shot up, the most you would pay is 8 percent on that $300,000, which would mean a max monthly payment of $2,201.29, or about $936 more than your original payment.

If you are thinking about an ARM, Titsworth suggests having the loan officer run a few examples of payments, including the worst-case-scenario payment. It may be eye-opening.

What if You Have an ARM Now?

Don’t panic, Grandi says. “Everyone currently in an ARM should not necessarily be hounding their mortgage expert to refinance into a fixed-rate mortgage,” he says.

In fact, if you have a low-rate ARM now and you refinance into a 30-year fixed-rate mortgage, you’d likely pay around 4 percent and your monthly payment would jump a little. With that previous $300,000 ARM example, Grandi says, the homeowner’s payment would go up less than $200 a month.

That may well be worth it to have the comfort of knowing you have a fixed mortgage payment. But if you’re planning to move in the next couple of years, you’re probably better off keeping the ARM. That’s because one of the biggest factors in whether you should get an ARM is how long you plan to live in your house. Generally, if you’re going to live in your home for a short time before selling it, an ARM is considered a financially shrewd move.

“I’m a big believer in ARM loans and have one now,” Titsworth says. “Adjustable rate mortgages are a good option for consumers that have a shorter-term need, and also those that are comfortable with a little risk,” she adds.

Who Shouldn’t Get an ARM?

Do what you want, but if you’d like some general rules of thumb, there are three types of homeowners who should likely avoid an ARM.

— First-time homebuyers. Ali Vafai, president of The Money Source, a national correspondent lender and mortgage loan servicer on New York’s Long Island, says first-time homebuyers or those with little down payment should not choose ARM loans. Since rates are near historic lows today, he says it’s very likely rates will be higher in five years and payments would increase after the fixed period. Even if you’re not planning to stay very long, maybe you’ll discover you hate moving and and realize you don’t want to go anywhere.

— People on a tight budget.So you scraped up your down payment, barely, and you figure you can afford to live in a house if you pare back your budget a bit. It sure doesn’t sound like you would do well if, in five years, your monthly mortgage payment shot up a couple hundred dollars a month.

— Natural-born worriers.As has been duly noted, ARMs are a risk. Before you get an ARM, ask yourself some risk-related questions, Grandi suggests.

For instance, when you’ve been living in your home for two years, will you suddenly have sleepless nights because you aren’t sure what your mortgage payment will be in three years?

“Do you expect continued doom and gloom for the United States’ economy with unemployment increasing and inflation staying low?” Grandi asks.

In other words, if you a worrier, the ARM is probably not for you.

Titsworth agrees. She loves the ARM, though, and points out what isn’t often emphasized: When your fixed rate ends and it adjusts, your monthly payment doesn’t necessarily have to go higher. “It’s possible the rate could drop,” she says.

Still, all in all, “ARM loans are typically not the product of choice for someone that believes they will be in their home long term and wants [the] peace of mind of knowing what their payment will be,” Titsworth says. “The long-term fixed rates come with less risk and therefore a higher rate.”

The last time the Fed raised rates, “the iPhone didn’t even exist,” says Mark Fleming, chief economist for title insurance company First American Financial Corporation.

Interest rates in the U.S. have been close to zero for the last seven years, intentionally kept low to allow employment and the market to recover from the crash in 2008.

For new homebuyers, the expectation of a rate hike spurred many to buy in the months leading up to the decision and encouraged a cycle of refinancing from existing homeowners.

But the moderate rate increase does not spell doom if you’re looking to buy a home — in fact, it may give you the push you need to get out there and buy your home before interest rates rise again, something economists are predicting for 2016.

How will rising interest rates affect you as a homebuyer? U.S. News asked experts to weigh in on whether you should be concerned about your ability to afford a mortgage and what you should know about interest rates in the next year.

The Fed’s decision doesn’t affect your interest rate as much as you may think. While the interest rate policy changes will affect how interest rates are offered, mortgage rates function separately, and are in fact far more volatile than the Fed’s interest rate.

Jonathan Smoke, chief economist for realtor.com, explains rates for new fixed mortgages not only fluctuate on their own, but have changed in anticipation of increased Fed interest rates, without any actual change in policy.

“When you look at the volatility of what rates have done around the ‘what is the Fed going to do’ all year long, we’ve had enormous movement in mortgage rates,” Smoke says. “We’ve had roughly 70 basis points of movement in the 30-year [fixed-rate mortgage] alone in the last 12 months when the Fed hasn’t done anything.”

Rising interest rates don’t mean you can’t find a mortgage that works for you. The rate hike by the Fed is minor and isn’t likely to squeeze too many consumers out of being able to buy a home. You might have to reconfigure what you put down versus what you pay monthly but as Smoke emphasizes, mortgage rates differ from day to day and lender to lender.

“It’s like buying gasoline — it’s different by provider, it’s different one street to the next,” Smoke says.

Higher interest rates can give the push you need. Many economists are expecting interest rates to continue to increase throughout the next year by a total of 1 percent, and while they are small, steady increases, getting a mortgage on the lower end is always a better idea than waiting and paying more.

Steve Rick, chief economist for CUNA Mutual Group, which builds financial products for credit unions nationwide, says that extra push to get homebuyers and other consumers movingin the marketcould serve as an additional stimulus for the economy.

“We could see faster economic growth next year because the Fed is raising rates, because it will help with confidence, and it will help with people trying to get ahead of the rising rate environment,” Rick says.

Increased rates can help keep home appreciation in line with wage increases. As housing markets continue to recover from the recession, home values have been appreciating rapidly, outpacing wage increases and making it more difficult for everyone to afford them.

“When you raise rates, you slow down the pace of house price appreciation,” Fleming says, noting mortgage rates will go up regardless of the Fed’s decision. By slowing the increase of home prices, the same people who could afford a house today will likely be able to afford the same house down the line, without being edged out by rapid property appreciation.

But at the moment, Rick notes, “housing is still relatively affordable,” and after such a long period of no interest rate changes, the Fed’s decision to increase rates by 0.25 percent isn’t going to stop people from making big purchases such as cars or homes with financing.

If you already own a home, you likely don’t have to worry about adjustable-rate mortgages. Because chances are you don’t have one. “The majority of mortgages that were taken out in the last couple years were 30-year fixed mortgages,” says Svenja Gudell, chief economist for Zillow. “We’re talking 85 to 90 percent of originations.”

Gudell notes many homebuyers are overinsured with a 30-year fixed rate mortgage — because the chances they’ll stay in one home for 30 years are slim — but many are not willing to take the risk of facing higher rates down the line in the wake of the subprime mortgage crisis.

But if you get an ARM, you don’t need to be scared. ARMs typically have a locked interest rate between five and seven years, so your interest rate is unaffected as long as you’re in that period. But even if you are in the floating rate part of your mortgage, Gudell and Fleming agree that rate hikes down the line will likely remain affordable.

“The increase in the mortgage rates are going to be so tame and so controlled that [homeowners] will be able to adjust over time,” Gudell says.

Fleming adds that a 1 percent total increase by the end of 2016 will likely bring your interest rate to 4 to 5 percent, equating to about $50 to $70 per month in additional payments, which is minimal. “You can find 50 bucks by going to Starbucks less often,” he says.

You should still shop around. Treat your mortgage like any other major purchase — weigh your options and compare rates before you sign on the bottom line. The mortgage, and your ability to pay it off, are just as important as the house you choose to buy.

“Consumers will be able to mitigate some of the increases by putting as much effort into finding their mortgage as they do in finding their dream home,” Smoke says. “You don’t just take the first offer; you don’t just go to the lender that was recommended. Pursue and understand that you can get different rates.”

You don’t have to pretend the holidays don’t exist if your home is on the market this time of year.

Selling a home during the holidays can be tricky. Decorations could turn off potential buyers who might have been interested in buying a particular home — if they hadn’t been distracted by the huge collection of inflatable decor in the front yard.

“Curb appeal is an important element of real estate at any time of the year,” says professional home stager Krisztina M. Bell of Virtually Staging Properties Inc. in Atlanta. “During the holiday season, curb appeal often takes on a new meaning as people decorate their homes and landscapes to reflect the joy [of the season]. There is a fine line between attractive outdoor decorating and pushing the limits, especially when staging a home during the holidays.”

The good news is that you don’t have to completely avoid holiday decor. In fact, says Justin Udy, a real estate agent with Century 21 Everest Realty Group in Utah, “homes can actually show better during the holidays.”

Here are five ways to enhance your home’s curb appeal during the holidays.

Light it Up

“A well-lit entryway provides a charming invitation for guests or potential homebuyers,” says Bell. “Use LED candles or lanterns with globes to light entryway steps and walkways. If there is a wreath or arrangement on the door, place a spotlight on that area to highlight the festive accessory and create a warm, welcoming glow.”

If you must decorate with string lights, white lights are best, adds Bell. “White outdoor lights on the outside of a home are recommended, and are inspiring and beautiful,” Bell says.

Skip the Kitsch

While you may adore that waving Santa inflatable in your yard or shrubs covered in colored lights, rethink bold statement decorations when your house is on the market. “Avoid the blowup snowman, reindeer and the like strewn about on the front lawn, as you don’t want to distract and take away from the features of the home,” says Bell. “Less is best.”

“It is key to maintain a very clean and crisp appearance,” says Josh Myler, a real estate agent with The Agency in Los Angeles. “Buyers want to feel comfortable but also have the room to envision their own belongings and decorations in what might just be their new home. Clutter is never a good thing, and the holidays have a tendency to bring out more of it.”

Create Vignettes

Focus on simple yet eye-pleasing holiday vignettes throughout your home. “Create a vignette in a wheelbarrow, or use a small section of patio,” suggests Bell. “Use simple holiday decorations, plants, and other items to create an attractive scene to spruce up outdoor spaces.”

Fashion a Welcoming Entry

If you decide to rid your home of all holiday decor except for a few key items, make sure to include a wreath on your door. “One of the great things about wreaths is that they can easily be customized to match the personality of the home,” says Bell. “A simple live wreath on the front door is classy. Add a big bow for major impact.”

For the past decade, housing in Las Vegas has been a scene straight out of the Wild West. Rules have been bent, and lives ruined — a consequence of a housing crisis that caused such catastrophic and widespread declines in home values that much of the city remains on its knees. (Click here for Zillow’s video on the Las Vegas bust.)

At one point in 2012, more than 70 percent of Las Vegas homeowners with mortgages were underwater, many of them owing more than twice what their homes were worth.

The negative equity rate has fallen to 25 percent but remains higher than any other major market. In normal markets and times, that rate is closer to 3 percent.

Among those affected is Terrie Brooks, a bingo agent for 30 years who never dreamed she’d resort to giving blood to pay her mortgage.

With income of $60,000 a year and money in savings, she paid her mortgage for four years after the recession hit and her employer cut her hours.

She fell behind after her college-age son, who rode a moped between classes and work to save on gas money, was in a terrible accident. A traumatic brain injury left him incapacitated for two years before he died.

“I thought I had put away for a rainy day and was keeping up. Once my son was in the hospital, I didn’t care,” said Brooks, who often stayed home, even when work called, to feed her son and otherwise care for him.

“I gained weight, my health went to hell. You don’t care anymore…. Then you say, ‘Look what a mess I’ve gotten into because I didn’t care.'”

Brooks tried to make up for the lost hours by selling blood and participating in focus groups.

She also tried to get a loan modification but became stuck in a bureaucratic cycle — a process so common it was the subject of one of the focus groups she was paid to attend.

Squatters and Their Tenants

Getting a loan modification when people all over town — and many across the country — want one too is no simple thing.

Some people give up and stop paying.

“I closed a deal in August where a guy hadn’t made a payment in 88 months,” said Tim Kelly Kiernan, a real estate agent with Re/Max Benchmark Realty.

“It wasn’t illegal. He was just playing the system.”

ZillowTim Kelly Kiernan

That homeowner wasn’t alone, by a long shot.

Many people in Las Vegas stopped paying their mortgages for months and years at a time with little consequence.

Some filed for bankruptcy and walked away, assuming lenders would take ownership, only to return years later to find the homes still in their names.

Sometimes, their homes had been taken over by squatters or, more absurdly, by renters making monthly payments to someone who’d swooped in and pretended to be the owner of an empty house.

Kiernan had one such client who ended up doing a short sale — negotiating with his lender to sell the house for less than he owed — and walking away with cash to relocate (and to leave the house in good condition).

There were even cases of homeowners being sued by squatters who were injured while squatting, Kiernan said.

“I can’t make this stuff up,” he said. “There are all these crazy stories, and [that] story is very common — people filing bankruptcy and leaving their property thinking they were done.”

Tangled in Red Tape

Getting lenders’ attention is the hard part.

For a while after the housing bubble burst, lenders rubber-stamped foreclosures so fast — in Las Vegas, foreclosures reached six times the national rate — that they ended up in trouble and were forced to slow down.

Now they often approve short sales and loan modifications, if a borrower keeps the same lender long enough to negotiate such a deal and to exchange the proper paperwork.

“It can be very frustrating,” said Christine Miller, a lawyer at the Legal Aid Center of Southern Nevada.

“Even though you sent a packet, and the fax transmittal shows 54 pages went through, they [the lender] will say they don’t have it, or to send it again.”

It’s against mortgage servicing regulations to draw out the process, but fighting that means filing a complaint with the Consumer Financial Protection Bureau, “and that’s a process” as well, Miller said.

Tangled in financial red tape, some homeowners turn to experts like Judah Zakalik, an attorney who for two years defended banks against predatory lending lawsuits, then was laid off and switched to the consumer side.

ZillowJudah Zakalik

People have to be careful where they turn for help, Zakalik said.

“When we started in 2009, there were probably over 250 loan modification specialists and attorneys in this city doing this work,” he said. “A lot of them were taking advantage of people’s desperation.”

Some charged upfront fees, then skipped town. Others filed bankruptcy papers but didn’t take clients’ names off homes — and squatters often beat lenders to those properties.

Even now, people are renting abandoned homes from landlords who are not the rightful owners. “I see it at least once every two weeks. I saw it this morning,” Zakalik said.

A Morality Shift

Despite their dire situations, many people balk at filing for bankruptcy or not making mortgage payments.

“They’ve been told, ‘You’re a bad person if you do that,'” Zakalik said.

During the recession, he said, “I’d sit down with people and have discussions about their morality. [I’d tell them] you have to look out for your family’s future. If you throw $700,000 at this loan, you’re taking away money you could invest in your future, your retirement, your children’s future.”

The need for those discussions has waned.

“People understand that now. They understand that corporations are looking out for their own best interests, and they have to look out for themselves.”

There’s been a shift in moral consciousness, he said, “at least in this city.”

Military retiree Robert Lujano stopped making payments just to get his lender’s attention.

“They said, ‘You’re not making payments.’ And I said, ‘That’s right. Didn’t I try for five years to get you to refinance?'” Lujano recalled.

He negotiated a short sale that included $2,500 in relocation fees. It only marginally hurt his credit score, and he plans to buy another house next spring.

“This would be a great time for many, many people to buy a house,” he said.

With help from the legal aid center, Brooks also renegotiated her mortgage — but the relief is temporary.

Her monthly payment has dropped from $1,300 to $760. After 22 years, however, she will owe the full balance of her original loan — $100,000.

“They said, in a couple years I can do a short sale,” Brooks related hopefully.

If not, there’s bound to be another way.

Already, a passel of homeowners are pioneering another mortgage frontier: re-defaults.